The transaction, which will boost revenues by nearly 23 per cent, will see Saputo expand its U.S. operations by adding dairy and non-dairy products to its current operations as a cheese manufacturer, distributor and importer.
The move will effectively replicate the breadth of the Montreal-based company's current Canadian operations and create a U.S. division of comparable size.
"This is only going to solidify our position as the No. 2 provider of dairy in North America," CEO Lino Saputo Jr. said in an interview Monday.
Morningstar, a division of industry leader Dean Foods, has about 2,000 employees and 10 manufacturing plants in the United States. It had the equivalent of C$1.6 billion in revenue during the 12 months ended September.
By comparison, Saputo (TSX:SAP) had about $1.7 billion of revenue in its second quarter alone from cheese, dairy and bakery operations in Canada, the United States and other countries.
The transaction, the company said, will immediately add to its earnings. It projects the deal will boost earnings by 11.5 per cent above Saputo's $2.53 per share in adjusted annual profits, excluding an impairment loss on goodwill.
The combined company will have about $8.6 billion of revenues, $1 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) and $563 million of net earnings.
The acquisition is the largest for Saputo, although the Dairyland deal in 2001 was made when Saputo was a substantially smaller company. It has grown from $485 million in annual sales when it went public in 1997.
Saputo has made four acquisitions in four fiscal years. The most recent, before the Morningstar deal, was in March 2011 — a US$270.5 million deal for Fairmount Cheese Holdings, Inc., the parent company of DCI Cheese Company.
Following the Morningstar acquisition, Saputo will have about 12,000 employees and 57 manufacturing plants in five countries.
Morningstar makes a variety of dairy and non-dairy products such as creams, ice cream mixes, sour cream and cottage cheese. Its sales mix is 64 per cent foodservice and 36 per cent retail.
Saputo said it will benefit from Morningstar's national manufacturing and distribution footprint and will optimize coast-to-coast service. However, the company said there are no consolidation plans since Morningstar's operations are very different from its own in the U.S.
"Given the heavily regulated environment in Canada, there's very little cross-border exchanges within our company so it will have zero impact on our Canadian operations."
Saputo won Morningstar through a bidding process about two months after being approached by an investment banker.
Current Morningstar owner Dean Foods (NYSE:DF) said in a separate statement from Dallas that it expects to receive US$887 million from the sale after taxes and expenses. It said the money would be used to reduce Dean's debts.
"Morningstar is an attractive business and we believe that it will continue to grow and thrive in Saputo's portfolio," said Gregg Engles, chairman of Dean Foods.
"I'd like to personally thank the Morningstar team for their contributions to Dean Foods over the past 15 years and wish them well as they move forward under new ownership."
Lino Saputo said the company has the financial capacity to add up to $3.5 billion of debt in order pursue other acquisitions in the U.S., Latin America or Australia/New Zealand.
"This is not an acquisition by default by any stretch of the imagination. This is really a good strategic acquisition for us," he added.
Mark Petrie of CIBC World Markets said Morningstar has seized growth in high-margin categories such as iced coffees, but the industry is characterized by modest growth and limited internal expansion.
Its prices and margins have improved over the last 12 to 18 months, aided by deep cost-cutting and capital expenditure savings. Operating income surged 54 per cent in its recent quarter on a three per cent decline in revenues.
"This acquisition brings significant diversity to Saputo's U.S.-based manufacturing, which now effectively mirrors its Canadian business," he wrote in a report.
"If Canada's regulatory environment were to change and borders were opened up, this would give Saputo a strong platform to bring product from the U.S. into Canada."
Saputo said the Morningstar acquisition will help the company develop a flexible platform to thrive in any regulatory environment.
"If tomorrow morning the supply managed system will no longer exist in Canada and the markets would open up between Canada and the United States, I don't think that there's any better company set up or strategically oriented to take advantage of the opening up of the border," the CEO said.
Saputo has said it plans to expand in the United States, but has said it has no plans to bid for the assets of the bankrupt company that makes Twinkies snack cakes.
"I think there are some opportunities for us to penetrate the U.S. market because of what's going on with Hostess and we've got a great management team in place that's looking at those opportunities, but our growth in bakery will not come through acquisitions."
On the Toronto Stock Exchange, Saputo's shares briefly hit a new 52-week high, but closed up $1.37, or nearly three per cent, to $47.41 in Monday trading.